A section of the bill, which passed the House of Representatives on May 22, takes aim at countries including Canada, the UK, France and Australia that impose “digital services taxes” on large technology companies such as Meta Platforms Inc. It also targets countries using provisions in a multicountry deal for minimum corporate taxes.
The move to target allies with which the US has decades-old tax treaties underscores US President Donald Trump’s willingness to change or break longstanding agreements with other nations.
The so-called Section 899 provision includes “what you could call a ‘revenge tax’ against what the US considers to be unfair taxes that are levied by other countries on US businesses,” said Robert Kepes, partner with tax law firm Morris Kepes Winters LLP in Toronto.
Institutional investors including sovereign wealth funds, pension funds and even government entities would be affected, as well as retail investors and businesses with US assets.
Section 899 would increase the federal income tax rate on passive US income — such as dividends, interest and royalties — earned by people and institutions that are based in the targeted countries. The first increase would be five percentage points, rising by another five points each year to a maximum of 20 points above the statutory rate.
Tax treaties are meant to prevent an entity from being taxed multiple times on the same income. This section of the bill “effectively overrides certain US tax treaty obligations — a significant departure from longstanding treaty commitments,” according to an analysis by attorneys at Greenberg Traurig LLP.